Explaining distress-related firm exit: analysis of exit paths

Bankruptcies, voluntary liquidations, takeovers and mergers resulting from corporate financial distress play an important role in the economy and may have severe implications for many stakeholders. The current global climate of high failure rates has therefore attracted the attention of academia, practitioners and policy makers, aiming to gain a thorough insight into business failure. Diverse shortcomings in the existing literature on failure prediction, failure paths and firm exit – often related to a narrow view to business failure – however limit our general understanding of business failure.
This dissertation aims to extend our knowledge of the broader phenomenon of business failure. A first literature review study provides an overview of the shortcomings of the classic cross-sectional failure prediction models, which are extremely popular in business failure studies. This study emphasizes the focus on bankruptcy as the only exit resulting from failure, the neglect of the dynamic nature of failure and diverse causes of over-modelling.
With a view to gain further insight into the broader phenomenon of business failure, two large scale empirical studies conduct an in-depth investigation of distress-related firm exits. Besides bankruptcies, they explore voluntary liquidations and takeovers, mergers and splits. This broader, dynamic and multi-level approach involves an investigation of exit paths, from the first sign of distress to legal exit. Both empirical studies are based on an extensive dataset of 6,118 Belgian distress-related exits of privately held, mature SMEs.
The first empirical study identifies determinants of the exit type through diverse firm characteristics at the first sign of distress and at exit. The results show that the available and potential slack resources and different factors influencing the relative expected value of voluntary liquidation compared to takeover or merger, impact the eventual exit after distress.
The second empirical study explains the period between first signs of distress and exit by court driven exit (mainly bankruptcy) or voluntary liquidation. The results suggest that high slack resources at the first sign of distress postpone bankruptcy, but accelerate voluntary liquidation. Further, a high degree of stakeholder dependence extends the time to exit after distress, both for court driven exits and voluntary liquidations.

@phdthesis{818103,
abstract = {Bankruptcies, voluntary liquidations, takeovers and mergers resulting from corporate financial distress play an important role in the economy and may have severe implications for many stakeholders. The current global climate of high failure rates has therefore attracted the attention of academia, practitioners and policy makers, aiming to gain a thorough insight into business failure. Diverse shortcomings in the existing literature on failure prediction, failure paths and firm exit -- often related to a narrow view to business failure -- however limit our general understanding of business failure.
This dissertation aims to extend our knowledge of the broader phenomenon of business failure. A first literature review study provides an overview of the shortcomings of the classic cross-sectional failure prediction models, which are extremely popular in business failure studies. This study emphasizes the focus on bankruptcy as the only exit resulting from failure, the neglect of the dynamic nature of failure and diverse causes of over-modelling.
With a view to gain further insight into the broader phenomenon of business failure, two large scale empirical studies conduct an in-depth investigation of distress-related firm exits. Besides bankruptcies, they explore voluntary liquidations and takeovers, mergers and splits. This broader, dynamic and multi-level approach involves an investigation of exit paths, from the first sign of distress to legal exit. Both empirical studies are based on an extensive dataset of 6,118 Belgian distress-related exits of privately held, mature SMEs.
The first empirical study identifies determinants of the exit type through diverse firm characteristics at the first sign of distress and at exit. The results show that the available and potential slack resources and different factors influencing the relative expected value of voluntary liquidation compared to takeover or merger, impact the eventual exit after distress.
The second empirical study explains the period between first signs of distress and exit by court driven exit (mainly bankruptcy) or voluntary liquidation. The results suggest that high slack resources at the first sign of distress postpone bankruptcy, but accelerate voluntary liquidation. Further, a high degree of stakeholder dependence extends the time to exit after distress, both for court driven exits and voluntary liquidations.},
author = {Balcaen, Sofie},
language = {eng},
pages = {XVI, 195},
publisher = {Ghent University. Faculty of Economics and Business Administration},
school = {Ghent University},
title = {Explaining distress-related firm exit: analysis of exit paths},
url = {http://lib.ugent.be/fulltxt/RUG01/001/376/345/RUG01-001376345\_2010\_0001\_AC.pdf},
year = {2009},
}